Zhuhai Comleader Information Science & Technology (SHSE:688175) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Zhuhai Comleader Information Science & Technology (SHSE:688175) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Zhuhai Comleader Information Science & Technology:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.027 = CN¥51m ÷ (CN¥2.0b - CN¥164m) (Based on the trailing twelve months to December 2023).

Therefore, Zhuhai Comleader Information Science & Technology has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.6%.

Check out our latest analysis for Zhuhai Comleader Information Science & Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhuhai Comleader Information Science & Technology's ROCE against it's prior returns. If you'd like to look at how Zhuhai Comleader Information Science & Technology has performed in the past in other metrics, you can view this free graph of Zhuhai Comleader Information Science & Technology's past earnings, revenue and cash flow.

What Can We Tell From Zhuhai Comleader Information Science & Technology's ROCE Trend?

When we looked at the ROCE trend at Zhuhai Comleader Information Science & Technology, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 2.7% from 12% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Zhuhai Comleader Information Science & Technology has done well to pay down its current liabilities to 8.2% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Zhuhai Comleader Information Science & Technology's ROCE

We're a bit apprehensive about Zhuhai Comleader Information Science & Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 39% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Zhuhai Comleader Information Science & Technology, we've discovered 2 warning signs that you should be aware of.

While Zhuhai Comleader Information Science & Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.